Greece may have to default on its debts and impose curbs on bank withdrawals before reaching a deal with its creditors, according to Goldman Sachs, as a crucial payment deadline approaches.

Merkel calls in Draghi and Lagarde for Greek debt talks

Read more

The pressure on Athens increased on Monday as a senior German central banker warned that it was “five minutes to midnight” for a Greek financial system on the cusp of collapse.

Goldman Sachs broached the subject of a default in a note published on Monday, claiming that the country could be forced into drastic measures amid fears that it will miss a €305m (£220m) payment due on Friday to the International Monetary Fund.

It will be “very challenging” for Greece and its creditors to reach a deal to unlock the final €7.2bn of the country’s bailout aid, said the bank’s chief European economist, Huw Pill. Warning that Greek government cash reserves were nearly exhausted, Pill said new elections could be triggered in Greece, alongside a debt default and limits on removing cash from banks.

“Facing this reality, a new political mandate­­ and thus a new government, a referendum or new elections ­­ will be required in Greece,” he said. “Not only is it possible that we may need to see sovereign technical default and/or blocked Greek bank deposits in order to come to an accommodation between Greece and its official creditors, it may be necessary to do so in order to break the current impasse in negotiations.”

Greek banks, which have been surviving on emergency loans from the European Central Bank, have seen massive outflows in the past week. Andreas Dombret, an executive board member of the German central bank, told the Bild newspaper: “The Greek government would be well advised to act quickly. For the Greeks banks, it is five minutes to midnight.”

At the beginning of a month that could decide the country’s future in the euro, the government of the Greek prime minister, Alexis Tsipras, has signalled it is holding out for an interim agreement with the country’s three creditors: the IMF, the EU and the European Central Bank.

“A temporary deal is close,” said the financial daily Naftemporiki, citing government sources. Greek sources were investing hopes in the meeting in Berlin on Monday night between the German chancellor Angela Merkel, the French president François Hollande and the president of the EU commission, Jean-Claude Juncker.

The Greek government would be well advised to act quickly. For the Greeks banks it is five minutes to midnight

Andreas Dombret

After five months of fruitless talks and several false dawns, EU officials refused to be drawn on whether a cash-for-reform deal was in sight, leading to the release of at least some of the €7.2bn in rescue aid still outstanding.

With its current bailout programme expiring on 30 June and debt repayments this month alone of €1.6bn to the IMF, all agree that crunch time has arrived for Greece. After a series of increasingly desperate moves – sequestering funds from local authorities and government bodies – cash reserves have all but run dry.

“We are at the edge of the cliff, we are on the brink,” a finance ministry official told the Guardian. It was unclear, he said, what would happen next.

In the final stretch of negotiations that began when Tsipras’s radical left Syriza party was catapulted into office in January, lenders showed little inclination on Monday of being lenient. Speaking in Berlin, which has provided the bulk of Athens’ €240bn bailout, Merkel’s spokesman, Steffen Seibert, reiterated that the price of further assistance would be a “far-reaching reform package”.

The German finance ministry struck a similar note, announcing that Greece still had to deregulate its labour market, reform its social security system and push ahead with the sale of state-owned assets. “The aim of these individual measures is to restore Greece’s debt sustainability,” said finance ministry spokesman, Martin Jaeger.

The three-way talks in Berlin came a day after Tsipras issued an excoriating critique of Greece’s creditors, claiming they were making “absurd” demands of his government.

In a newspaper opinion piece highlighting the depths of the divide between Athens and its creditors, the leader said the eurozone was at risk of being transformed into a “technocratic monstrosity”. “The issue of Greece does not only concern Greece,” Tsipras wrote in Le Monde. “Rather, it is the very epicentre of conflict between two diametrically opposing strategies concerning the future of European unification.”

While the first strategy, he said, aimed to “deepen European unification in the context of equality and solidarity,” the second strategy aimed to demolish it.

Reacting to the blunt attack, Juncker’s spokesperson hit back saying what mattered more in Greece’s battle to stay afloat were “concrete reform proposals” than op-eds. “Intense technical discussions have been taking place over the weekend and are continuing to take place,” Mina Andreeva told reporters in Brussels. “Progress has been made but we are not there yet.”

Even if a deal was agreed, it is likely to be messy and short–term, providing the country relief over a summer replete with debt repayments but once again kicking the great Greek debt crisis down the road. Athens must repay ECB bonds worth €6.7bn in July and August.

“Under no circumstances will it be the broad ‘unified’ deal that the government had hoped for, since it will even leave open the evaluation of the current programme which expires on 30 June,” Naftemporiki said. “Essentially, with a ‘temporary’ agreement the government and the prime minister will solve, albeit fleetingly, the suffocating problem of the country’s financial needs while on the part of the lenders a painful ‘Grexit’ will have been avoided.”

Differences over demands that both sides had been unable to bridge would be tackled again in the autumn.

Tsipras faces mounting dissent from within his own ranks, with infighting in Syriza boiling over as the government failed to reach a promised agreement with lenders.

The politician was forced to drop the World Bank economist Elena Panaritis, who had been proposed for the post of Greek representative at the IMF, after senior government officials demanded that the appointment be cancelled on the grounds that she had previously represented the pro-bailout Pasok party in parliament.

• This article was amended on 5 June 2015. An earlier version referred to “handouts” where “loans” was meant.